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November 18, 2016

UC Divestment Activists Fail to Consider Costs As Tuition Rises

Divestment activists are back to work in California, calling on the University of California system to divest from fossil fuels just as the system’s board approves tuition increases to accommodate increased enrollment.

According to the school paper:

“UC Chief Financial Officer Nathan Brostrom acknowledged an existing gap between the $7 billion received from UC tuition and state funding and the $30 billion operational budget. Brostrom proposed a $300 or less increase in tuition, depending on a potential increase in graduate student enrollment. This potential hike comes after last year’s approved enrollment growth of more than 5,000 students. An agreement between UC President Janet Napolitano and Gov. Jerry Brown to freeze tuition for two years is set to expire at the beginning of the 2017-18 school year.”

Yet despite this increase in costs, students called for the system to fully divest as a form of climate justice – failing to account for the real costs of divestment on the university.

As a reminder, back in September 2015, the University of California sold off coal and oil sands holdings but was vocally opposed to divestment. While divestment activists declared this a “huge win” for their campaign, in reality UC Board of Regents Chief Investment Officer Jagdeep Baccher came out against divestment, stating the decision was merely an investment decision and that “climate policy needs to be more complex than a divestment-or-nothing reflex.  Blanket divestment from fossil fuels grabs headlines but doesn’t actively address climate change.”

Baccher also highlighted the limited holdings the UC system had in coal and oil sands to begin with, stating “it’s important to note that to begin with we had less than a couple hundred million dollars of these direct holdings so it wasn’t really a debate for us in terms of selling these investments and we came to this conclusion on the basis of economics.”  UC Regent Bonnie Reiss also agreed. From her statement:

“It was really the belief of everyone on this committee, myself included, who cares about climate that simply divesting from a list of a couple hundred companies that the students were presenting would absolutely do nothing. So we sell a few shares and stocks in an oil company. It won’t change their behavior in any way. It’s just symbolism without real impact and maybe gets a quick headline like we saw with Stanford.”

Given this, why would the university now consider divesting as it is facing new cost concerns that are forcing the school to increase tuition prices?

Endowments are meant to support universities and their expenditures, including but not limited to academic research, faculty and staff support, and facility development. Yet divestment imposes sizeable new costs on universities, both in the form of transaction and management fees as well as reduced diversification benefits. According to Prof. Bessembinder of Arizona State University, for instance, the transaction and management costs related to divestment have the potential to rob endowment funds of as much as 12 percent of their total value over a 20-year timeframe. This includes the onetime immediate transactions costs an endowment must endure, as well as ongoing annual management fees to stay in line with the changing definition of “fossil free.” Various other academics from the state have also spoken out against the costs of divestment on California institutions.

Luckily for California students, the UC Board of Regents has made no indication of changing its stance in opposition to divestment, and based on its previous track record, and the pure costs and ineffectiveness of divestment, California students can feel confident that won’t change anytime soon. But for activists pushing the state’s institutions to divest, it is time to consider the real costs of this movement.